Turmoil threatens vicious economic cycle

The turmoil that’s roiled Arab
states from Tunisia to Yemen is also creating a headache for those entrusted
with reviving economies hard hit by rising energy and food prices, growing
public debt and the prospect of more expensive borrowing on the international

Since mid-January, credit rating
agencies such as Moody’s have downgraded the sovereign debt of Tunisia, Jordan
and Egypt.

This week Moody’s changed the
outlook on Jordan’s foreign currency bonds to negative from stable, citing
“fiscal and economic downside risks related to ongoing turmoil in the
region following events in Tunisia and Egypt.”

Moody’s said that Jordanian
protesters “could use the regional uprisings as an opportunity to express
their discontent about high unemployment and the lack of development for
low-income groups.”

Standard & Poor’s, another
major credit rating agency, made a similar move.

Jordanian officials are not happy
with the downgrade, arguing that their public finances are sound — Jordan’s
foreign currency reserves actually rose last year and stand at about $12
billion — and that the economy may grow as much as 6 per cent in 2011.

Protests there have been largely
peaceful and far smaller than in Egypt and Tunisia.

 But after pledging to cut the budget deficit,
the government reversed course in January with a package of subsidies and
salary increases amounting to some $600 million, to compensate for higher

 International bond markets are wary that governments
may try to “buy their way” out of trouble, in the words of one

It is a potentially toxic cycle,
according to regional economists.

Egypt and Tunisia have already
suffered a loss of tourism revenue in peak season, while record-high grain
prices and a surge in the price of crude oil have fuelled inflation.

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